Asia presents huge developmental potential for Islamic finance

Dubai: Asia presents huge developmental potential for Islamic finance and is likely to be the main driver of Islamic banking growth in the near future given the untapped potential in India, Bangladesh and Indonesia, according to a report.

Islamic finance can be utilised for greater integration of financial markets with the real economy and for improvement of the economic balance between emerging and frontier markets, according to Kuwait Finance House Group report.

Islamic banking is banking that is consistent with the principles of Sharia which prohibits acceptance of specific interest or fees for loans of money.

Originally dominated by Islamic banking products and services, Islamic finance has expanded its offerings around the world to cover Shari, a compliant insurance and capital market (which include principally Islamic bonds and Islamic fund management).

Having thus grown across all component segments in Asia too, as at end-2013 the region`s Islamic finance assets totalled about USD 391.2 billion, equalling 22 per cent of Islamic finance assets worldwide, the report said.

Asia`s Islamic finance asset composition is characteristically balanced - in particular, among Islamic banking and Islamic bonds sectors - with Islamic banking accounting to 49 per cent of aggregate Islamic financial assets in Asia, followed by financial certificates (45 per cent), Islamic funds (5 per cent) and takaful (1 per cent), a co-operative system of reimbursement in case of loss.

However, the report did not provide details of Islamic banking operations in countries like India, Bangladesh and Indonesia.

Driving the industry in the region is Malaysia, the global leader in Islamic finance, particularly in the areas of Islamic banking, bonds and funds, the report said.

The Malaysian Islamic finance sector remains robust and continues its sustained growth patterns underpinned by strong regulatory support and various government initiatives intended to open up newer Islamic finance potential.

The country`s Islamic banking sector now accounts for approximately 25.7 per cent of the total domestic banking system, it said.

Malaysia is also host to 287 Islamic funds domiciled in the country - the highest in any single jurisdiction.

The Malaysian Islamic banking sector assets growth continued to outperform the conventional sector by growing at a double-digit rate.

In 2013, the Islamic banking sector grew by 16.5 per cent to account for 25.7 per cent of total assets in the overall banking system.

Between 2009 and 2013, the Islamic banking sector`s assets grew at a compounded annual growth rate (CAGR) of 16.4 per cent. In contrast, assets of the overall banking system grew at a CAGR of 8.8 per cent during the same period.